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Regardless of the Interior and Justice opinions, the legislative history on 2(c) is clear in one respect. The Congress sought to separate coal mining operations from railroad operations. In a floor statement during the debate on S. 2812 in the 65 th Congress, the Committee Chairman, Senator Ferris noted: "No railroad shall be a producer of coal except for its own use. It is thought that such separation of transportation from production will go a long way toward stamping out rebates, oppressive methods in shipment, and other existing evils.".
Proponents of the repeal of 2(c) claim that the fears of the earlier Congresses no longer apply and, given the enactment and enforcement of anti-trust laws, the dangers of railroads having competitive advantages if permitted to lease federal coal, are unfounded. However, those views are easily challenged and offer no confidence that repeal of 2(c) will not invite the same potential abuses opponents have been citing for years. In fact, recent activities among the three principle Westem railroads, the Union Pacific (U.P.), the Burlington-Northem (B-N) and the Santa Fe (S.F.), and a rapidly escalating interest in the development of Westem subbituminous coal for domestic use and foreign export have created new potential abuses in existing laws which could greatly frustrate the promotion of competition in the Westem coal industry. This Subcommittee should explore these issues before taking final action on this amendment.
The U.P., the B-N, and the Santa Fe railroads have, between them, control of more than 16 billion tons of proven recoverable subbituminous coal in the Northem Great Plains and Southwestem coal fields. Of those reserves, approximately 15 billion tons, or 93%, is in a checkerboard pattern of ownership. About 9 billion tons of railroad coal is inconmitted. That amounts to 17% of the total incommitted non-federal coal reserves in the West. Most of that incommitted coal ( 95% ) is in those checkerboard land pattems.
Most of the coal reserves under the control of the three railroads were acquired from the Federal government as granted lands between 1850 and 1871, during which time, 160 million acres of public lands were transferred. The primary purpose for the conveyance of the lands was to provide the railroads with a basis for financing construction of their lines by enabling them to raise funds from the direct sale or to obtain credit on the lands held. As of December 31, 1941, total net proceeds received by the railroads from land grant property was $435 million. The remaining lands, totaling about 16 million acres was valued at $60 million at that time. With the transfer of almost 10% of the continental land surface to the accounts of the railroads, they were able to finance about 17,500 miles of trackage, or about T% of total rail trackage in the U.S.
While the remaining grant lands have a significant resale value, the economic value of the surface resources and underground minerals is immense. Timber, oil and natural gas, hardrock minerals abound on these Western lands. Much of these resources are being developed actively by the railroads. But, without a doubt, the greatest land grant assets possessed by those three railroads are the strippable coal reserves. With present market prices of $8 to $10 per ton of strippable Montana or Wyoming coal, the gross value of that 16 billion tons of coal is somewhere between $130 and $160 billion. For the railroads, however, that potential revenue will be difficult in some instances impossible to generate since so much of those coal deposits are tied up in the checkerboard ownership pattem. And, therein rests the issue of 2(c).
When the Federal government granted lands to the railroads more than a century ago, it was not aware of the massive coal deposits beneath the surface. The value was represented in the timber, the right-of-way and the resale value to prospective settlers. The companies were awarded alternate cne square-mile sections of land on either side of the right of way, often 10 to 20 sections wide for each mile of track constructed. This land patter created great swaths of railroad land across North Dakota, Montana, Wyoming and parts of the Southwest. They ranged from 20 to 120 miles in width. Where - 5
antiguous acreage was not available, the companies were able to select land not adjacent to the right-of-way. The companies were free to make use of the timber and coal resources they had acquired, with the stipulation they be utilized for the express benefit of the railroad operation. That condition continues to receive the broadest interpretation as the original railroad companies found themselves being acquired by holding companies with ambitious plans for the development of those resources for profit.
Prior to the mid-1960's, there was little or no interest in marketing Westem subbituminous coal. It was too far from the market and too low in heat value to transport. It could not compete with the high quality Appalachian coals in the growing Midwestem and Eastern electric utility markets. However, a rapid post-war increase in Westem and Southwestem population, the Mid-East oil embargo, astronomicaloil price increases and tougher standards for the Clean Air laws all came together to give Western coal a resounding boost. From production totals of less than 20 million tons in 1965, Westem strip mines put out almost half of the Nation's 800 million tons of annual coal production. Consequently, the pressures upon the Federal government to open unleased and undeveloped coal lands in the West have steadily increased. The Western railroads are a part of this effort and no other economic interest has more to gain.
Checkerboard coal ownership patters present a difficult management problem for both the railroads and the Federal government. Neither party can achieve maximo economic benefit from their development without cooperation. Assume the red squares of the checkerboard are owned by a railroad and the black squares are held in the public trust by the Department of the Interior. If the Department were to offer its square of coal lands for bid to other than the adjacent railroad interest, a bidder would have to had previously negotiated with the railroad for future access to the contiguous blocks of coal surrounding the leasable acreage. Without such access, the bidder would risk a great dzal of money and market position since a coal buyer would not be interested in contracting with a company which could only offer 640 acres of coal in a single package a situation in which the railroad finds itself.
Therefore, the call for bids would find either ridiculously low bids, none at all, or, possible collusion between the railroad and the prospective bidder. That situation does not generate competition and certainly frustrates the purpose and intent of the Federal coal leasing program which is designed to assure maximum financial retum for the public from the sale of its resources.
If, however, section 2(c) were repealed, the railroad might offer a bid on that black square which it surrounds with the intent of creating a larger mining tract. If the company was intent upon wiming the bid, it would discourage other bidders by refusing to negotiate with them for access to the railroad coal deposits. The railroad would have the best available information on the potential reserves and on the prospective acreage since it would have 'the opportunity to take drilling samples on the surrounding lands. Where the railroad is the sole bidder, the public would lose considerable revenues since the company would not have to outbid any competition. The bid would go for a bargain-basement price and the railroad would - in a sense be awarded another land grant. The railroad would then have a block of 5 square miles of coal for the price of one.
Another argument against the blanket repeal of 2(c) is the prospect that, once the coal deposit is leased, the railroad could then mine and transport that coal. In the early years of the debate on prohibiting railroads to lease federal coal, many held the view that the Commodities Clause would prevent railroads from thwarting competition by hauling the coal they mined at reduced shipping rates. Enacted in 1906 as an amendment to the Hepbum Act, the Commodities Clause was intended to prohibit railroads from transporting goods which they produced or owned. However, recent Supreme Court cases have opened the interpretation and application of the Commodities Clause and railroads have found legal means to get around the restriction. Goods owned or produced by railroad affiliates have been found to be legitimate goods to be shipped by the railroad without violation of the law. This interpretation when tied to repeal of 2(c) could produce some fascinating coal development schemes.
Japan has been a long-time coal customer for the Appalachian coal producers. Its demand for 5.5 million tons of metallurgical coal in 1960 has risen steadily to more than 28 million tons in 1974. However, during those years Australian coal suppliers have steadily increased their Japanese and Far Eastem markets from 1 million tons in 1960 to 25 million tons in 1974. In 1978 though, U.S. shipments plummeted to 8 million tons while Australian deliveries shot up to 27 million tons.
With the more than 1000% increase in oil prices since the 1973 oil embargo and the consequent political unrest in the Middle East since the Iranian uprising, Japan a country almost totally dependent upon oil imports has been forced to rethink its future energy strategy. Coal is its obvious choice and the U.S an eager supplier. Therefore, U.S. exports to Japan could easily double or quadruple since Japanese projections call for increased imports of 56 million tons by 1990. In the middle of this furious bidding war, the Western governors and coal producers are working together to negotiate the best deals.
Teams from both countries have been trading offers, packaging deals, offering financial backing, planning shipping facilities and securing contracts. At stake are billions of dollars in U.S. coal revenues and a healthy improvement in U.S. balance of trades if the U.S. can outbid Australia. If the rapid and steady increase of Australian coal to Japan is any indication, one could draw the conclusion that the Japanese are tweaking U.S. producers to outbid the Australians with the underlying intent of persuading Australia to keep its prices down. But, the West has not put its cards on the table yet.
Western coal is taken from thick seams - often. 40 to 80 feet close to the surface. Massive earth-moving equipment cuts down on labor costs and adds to the efficiency of the operation and the result is a very low market price. However, its shipment to the Western seaports is very Expensive, given the mountainous terrain it must cross.